June 4, 2019
By Swati Pandey
SYDNEY (Reuters) – Australia’s central bank cut its cash rate to a record low 1.25% on Tuesday in what could be the first in a series of stimulus measures amid growing calls for policymakers to revive the country’s slowing economy.
The Reserve Bank of Australia (RBA) lowered rates for the first time in three years with data due on Wednesday likely to show annual growth in the A$1.9 trillion ($1.33 trillion) economy slowed to a decade low of 1.8%.
“The Board took this decision to support employment growth and provide greater confidence that inflation will be consistent with the medium-term target,” RBA Governor Philip Lowe said in a brief statement.
In a signal that the door was still wide open for further cuts, if need, Lowe said: “The Board will continue to monitor developments in the labor market closely and adjust monetary policy to support sustainable growth in the economy and the achievement of the inflation target over time.”
The Australian dollar nudged up 0.15% to $0.6987 after the rate decision as a cut was fully priced-in. Financial markets now predict a second cut by September with a 50-50 chance of a third move before the end of the year.
Australia’s rate cut is the latest in a swing by central banks around the world toward looser monetary policies as the intensifying Sino-U.S. trade war threatens global economic prospects.
South Korea’s central bank last week kept its policy settings unchanged but adopted a more accommodative tone while India is expected to cut rates at its policy meeting on Thursday.
Australia’s economy has dodged a recession since the early 1990s but is now battling falling home prices, rising unemployment, sluggish consumer spending and lukewarm inflation.
However, Lowe said monetary policy alone will not be enough to boost economic momentum as households were already up to their eyeballs in debt, putting the onus on Prime Minister Scott Morrison to slash income tax and boost spending.
“I don’t think that the RBA will be in a hurry to push rates down, preferring more support from government spending to lift economic activity,” said Kerry Craig, global market strategist at JP Morgan Asset Management.
“By their own admission the RBA knows that cutting rates when they are already at historical lows will be less effective, especially when set against the highly indebted household sector,” Craig added.
“Another, stronger, call for a coordinated policy response from the government may limit the need for cuts in 2020.”
In a further boost to borrowers, Australia and New Zealand Banking Group said immediately after the RBA’s decision that it would lower its mortgage rates by 18 basis points.
Other banks were expected to follow suit after Treasurer Josh Frydenberg told the heads of the country’s Big Four banks the government wants them to pass on the rate cut in full.
Last month, Australia’s prudential regulator proposed lowering stress-test limits for mortgages.
(Reporting by Swati Pandey and Wayne Cole; Editing by Sam Holmes & Shri Navaratnam)